Business Tips: Employee Taxes; to Pay or Not to Pay

There are so many things that a small business has to think about when that dreadful time of year comes around, and we have to think about paying taxes.

If you are a newer business, and have just gotten into hiring staff or employee’s, you might find yourself a bit queasy when it comes to thinking about meeting with your tax agent.

Employment taxes are no fun, and in some cases can cost a small company more than its worth. This is why it is so essential that you understand the difference between Independent Contractors and Employee’s.

Now, in this article, we are not going to get to detailed. Instead, I will furnish you with any easy to understand, informative piece that will help you get a grasp for your employment taxes.

Employee? Or Independent Contractor?

First, lets go over some definitions:

Section 530: this is a part of employment tax law that gives “relief” to business and employers, and grants that they do not have to pay employment taxes. It basically means that you are hiring independent contractors instead of employee’s. This is the relief that every business would like, but only certain can have.

Employee: An employee is someone that you hire to work solely for your company to do a specific job. You control their pay and the work that they do.

Independent Contractor: An independent contractor is a person that you hire to come and do a specific job as needed. You do not control the work that they do, only the job they are hired to do at the time. They control the pay rate, even if you decided what it was.

Save Haven: This is a term used to describe a time when a business gains relief from section 530 and does not have to pay employment taxes

Prima Facie: It is a latin term for “Burden of Proof”

Now that we have gone over some troublesome, but easy to remember definitions, lets talk about how to define an Employee, verses an Independent contractor.

First Things First

Before you venture into employing workers, or even if you’re already hiring, you need to make sure to define your workers as soon as possible. Trying to do it at tax time can waste a lot of money and time, and frustrate a lot of people including yourself. It can also cost you a lot more money that needed to be spent, and you will never get it back.

To be safe, instead of filing for either an employee or an independent contractor, you can fill out an SS-8 form to determine whether your worker is independent or employed by you.

This form can save you a lot of trouble, especially if the position or person’s filling the position changes frequently. Use it when ever you need it, as the IRS will look much more kindly on a business who wasn’t sure, than a business that filled wrong.

Employee

An employee is some that you hired to do a specific job. As your employee, they are hired to do what you tell them to do. If you change their job scope, or you add more work to their regular requirements, that defines them as an employee.

Because this person is an employee, you will have to pay employment taxes such as FICA, and you will also have to hold onto any withholdings that the employee or the government requires. This can be A LOT of paperwork, and you will want to study up to make sure you get all your book keeping up to date and correct.

Independent Contractor

An independent contractor is generally an outside source from your company. It may be a person that you hire to come perform a service for you or a client, and they generally are not always the same worker. Even if you do choose to use the same contractor multiple times, they can still be considered Independent Contractors.

Unlike with employee’s, you can not control the way an independent contractor performs their job or duties. You also do not control what the contractor is paid, or how they are paid, even if they agree to your set terms. They can at any time change their terms of service and/or scope of job functions.

The Thin Blue Line

In the world of Tax & Employment Law, many things are susceptible to being changed at will by the tax agent determining the case. This means that even if you can prove that you are hiring an independent contractor, the tax agent may still decide that you should pay employment taxes.

This isn’t the lovely side of the law that most of us like to think about, but there is nothing that can be changed from a stand point of “this sucks”. The only way to change the tax law, is to work for them or petition the government.

Safe Haven

There are many different technical terms for “safe haven” and you will encounter many of them. However, to keep things simple, lets just get to the point.

Prima Facie – the Burden of Proof. If you can prove without a reasonable doubt that your worker is an Independent contractor, than you will in most cases receive relief from section 530, and not have to pay employment taxes

Remember: If your worker disagrees with you, they also have to deal with Prima Facie, and if they can prove they are employee’s, you will have to pay or prove them wrong.

Consistency – If you, or your predecessor has continually treated all your workers as independent contractors, and there are no skewed versions of the same position in your company, then you will most likely be granted employment tax relief with section 530.

Remember: It also works in reverse. If you recently started treating employee’s as independent contractors, you might still have to pay employment taxes because your company was not consistent. Even if it was your predecessor that ran things that way.

Published Practice – You will hear many other terms for this, but it is simple enough. If you are a new business, and you follow the practice of an older business, you can possibly claim employment tax relief if that practice has been in business for more than 10 years. A.K.A: Industry Practice Safe Haven

Meaning, if a business that has been around for 10 years, is the essentially same business as yours, and they treat their employee’s as independent contractors and you copy them, you could receive tax relief because it is a “published practice” and the reason you chose to employ independent contractors instead of employee’s.

Remember: If there are no business’s that have been in practice for 10 years that are like yours, you might still have to pay employment taxes, depending on the situation and the tax agent.

Other Reasonable Basis – This is where things can get really hairy and confusing. This is a term generally used when a business is relying on “good faith” to receive employment tax relief.

It is a circumstantial part of employment tax law, and goes case by case. Don’t rely on this exemption unless you truly need to.

There are no two if’s and’s or but’s about it. Taxes are not so fun, but they don’t have to be difficult! If you would like more information, I have spent countless hours of www.IRS.gov and www.Score.org looking into business tax. Make sure to spend some time on those and other tax informational sites, and you to will find your way out